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It has been a tough year for Bitcoin miners.

2022 brought the nasty cocktail of rising costs and falling revenue. The former was predominantly affected by spiking electricity costs, while the latter came out of the plummeting Bitcoin price, which has fallen from its peak of close to $69,000 to $17,000.

This has put a squeeze on miners. So too, has the hash rate. The hash rate is the computing power contributing towards the Bitcoin network. It rises as the difficulty of mining increases. In other words, more miners means more competition and greater computing power required to derive revenue. And the hash rate continues to climb, bopping along at all-time highs.

As the pandemic bull market exploded upwards, gains for Bitcoin mining companies were dizzying. Many loaded up on debt to finance new equipment and boost hash rate – part of the reason the above chart shows such a steep rise.

Unfortunately, these investments didn’t pay off as Bitcoin plunged downward as the world transitioned to a high interest-rate environment, sending risk assets south across the board.

Many miners have gone under as a result, with the high-profile case of Core Scientific filing for Chapter 11 bankruptcy protection only a few of weeks ago.

The move to load up investment was rash in retrospect. Many mining companies simply assumed that Bitcoin had left its days of violent pullbacks behind it. But the crypto has shed three quarters of its value since its all-time high in November 2021.

Many mining companies, such as Core Scientific, did not have this in their range of outcomes. Ultimately, it has cost them, as their bloated debt balances weighed heavily as the Bitcoin price kept dropping.

The reliance of miners on the ultra-volatile Bitcoin price is clear. Their revenue is denominated in crypto, and its collapse this past year is the big reason why they have struggled. However, it is interesting to see that so many companies speculated on the price more than they had to.

There is nothing stopping mining companies from diversifying their interest by monetising the Bitcoin that they receive for their mining activity. However, the below chart highlights the diamond hands approach that mining companies took with regard to their reserves.

As the price of Bitcoin ballooned during COVID, companies did not sell – demonstrated by their reserves in BTC remaining relatively stagnant, but rising drastically in dollar terms.

If we zoom out to a longer time period, looking at 2018-2022, it is even more evident how aggressive the mining companies were – there was no change in their mantra to hold bitcoin, even as the market cap of Bitcoin surged past $1 trillion.

Of course, it is easy to be an armchair analyst here and waltz in with the benefit of hindsight. Nobody knew Bitcoin would plummet so sharply in such a small space of time. However, at the same time, we all knew it was a possibility.

Despite claims by fervent supporters that it could act as an inflation hedge, the reality is that it trades like a high-risk asset and it has peeled back many times in its history. To completely ignore the possibility of it simply doing what it has always done – that is, violently rising and falling – was ultimately the hubris that has killed a lot of these miners.

Again, this should not be read as a hindsight conclusion. Bitcoin could have gone to $200,000 and the crux of the problem would have remained: this was an overly aggressive move with regard to risk management.

For a lot of these miners to put their business at stake by overleveraging and refusing to sell reserves into fiat was a reckless decision. Sure, it could have worked out in the form of fat profits. But it still would have been a huge gamble given the historical volatility of Bitcoin. That much is obvious right now.

Either way, miners are facing a battle on many fronts, with the cost of electricity high and the markets in disarray. They’ll hope 2023 brings better fortunes.

The post <strong>Bitcoin miners made a big mistake during COVID</strong> appeared first on Invezz.

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